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Positions in Europe: Short Italy (EWI)

Keith shorted EWI in the Hedgeye Virtual Portfolio today with the etf overbought on its immediate term TRADE duration. Our thesis on Italy remains intact: the country’s public debt overhang will continue to compromise growth and compress tax receipts as PM Monti continues to press the austerity button that should crimp confidence and spending and heighten unemployment.  And recent fundamentals are reflecting this weakness: Retail Sales were down -3.7% in DEC Y/Y vs -1.8% in NOV; Business Confidence fell to 91.5 in FEB vs 92.1 in JAN; the Unemployment Rate rose to 9.2% in JAN vs 8.9% DEC; and CPI remains elevated at 3.4% in JAN Y/Y vs 2.6% for the Eurozone aggregate.

We’re forecasting a long TAIL to Europe’s sovereign debt ‘crisis’, especially under a scenario in which the current Eurozone fabric is maintained (that is to say Greece and Portugal don’t “default” and stay in the Union), which we think is probable given Eurocrat resolve. As the goalposts continue to change (think ISDA ruling on Greek debt) and uncertainty abounds (think structure around the ESM and EFSF or terms and outcome of a “fiscal compact”) we expect volatility ahead across European markets and we’ll tactically take advantage of these price swings.

Matthew Hedrick

Senior Analyst

Shorting EWI: Italy Trade Update - 1. MIB